**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C.  20549**








**FORM
      10-Q**





(Mark
      One)





x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934





For
      the
      thirty-nine weeks ended September 29, 2007





o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934





For
      the
      transition period from _______to _______











Commission
      File Number 1-5084





**TASTY
      BAKING COMPANY**


(Exact
      name of Company as specified in its charter)




Pennsylvania
              23-1145880(State
                  of Incorporation)
              (IRS
                  Employer Identification Number)


**2801
      Hunting Park Avenue, Philadelphia,
      Pennsylvania  19129**


(Address
      of principal executive offices including Zip Code)





**215-221-8500**


(Company's
      telephone number, including area code)











Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


YES
x  NOo








Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act. (Check one):


Large
                  accelerated Filer o
              Accelerated
                  Filer x
              Non-accelerated
                  Filer o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


YES
o  NOx




There
      were
      8,261,833 shares of Common Stock outstanding as of October 30,
      2007.








-1-





**TASTY
      BAKING COMPANY AND SUBSIDIARIES**








**INDEX**








PART
                  I.
              FINANCIAL
                  INFORMATIONItem
                  1.
              Financial
                  Statements (Unaudited)Condensed
                  Consolidated Balance SheetsSeptember
                  29, 2007 and December 30, 2006
              3Condensed
                  Consolidated Statements of OperationsThirteen
                  and Thirty-nine weeks ended September 29, 2007 and September 30,
                  2006
              4Condensed
                  Consolidated Statements of Cash FlowsThirty-nine
                  weeks ended September 29, 2007 and September 30, 2006
              5Notes
                  to Condensed Consolidated Financial Statements
              6-16Item
                  2.
              Management's
                  Discussion and Analysis of FinancialCondition
                  and Results of Operations
              17-21Item
                  3.
              Quantitative
                  and Qualitative DisclosuresAbout
                  Market Risk
              21Item
                  4.
              Controls
                  and Procedures
              21-22PART
                  II.
              OTHER
                  INFORMATIONItem
                  1A.
              Risk
                  Factors
              23Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              23Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              23Item
                  6.
              Exhibits
              24Signature
              
              25





-2-




**PART
                I.**
            **FINANCIAL
                INFORMATION**


**Item1.**
            **Financial
                Statements**




**TASTY
                  BAKING COMPANY AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED BALANCE SHEETS**(Unaudited)(000's)**September
                  29, 2007**
              
              
              **December
                  30, 2006****Assets****Current
                  assets:**Cash
              
              $
              112
              
              
              $
              12Receivables,
                  less allowance of $2,547 and $2,455, respectively
              
              
              20,395
              
              
              
              17,769Inventories
              
              
              8,093
              
              
              
              6,926Deferred
                  income taxes
              
              
              3,910
              
              
              
              3,040Prepayments
                  and other
              
              
              2,130
              
              
              
              1,414Total
                  current assets
              
              
              34,640
              
              
              
              29,161**Property,
                  plant and equipment:**Land
              
              
              1,433
              
              
              
              1,433Buildings
                  and improvements
              
              
              49,796
              
              
              
              43,110Machinery
                  and equipment
              
              
              124,287
              
              
              
              122,599Construction
                  in progress
              
              
              6,435
              
              
              
              1,902181,951
              
              
              
              169,044Less
                  accumulated depreciation
              
              
              109,956
              
              
              
              103,66071,995
              
              
              
              65,384**Other
                  assets:**Long-term
                  receivables from independent sales distributors
              
              
              10,217
              
              
              
              10,960Deferred
                  income taxes
              
              
              4,786
              
              
              
              4,596Other
              
              
              3,530
              
              
              
              2,19018,533
              
              
              
              17,746**Total
                  assets**
              
              $
              125,168
              
              
              $
              112,291**Liabilities****Current
                  liabilities:**Current
                  obligations under capital leases
              
              $
              583
              
              
              $
              327Notes
                  payable, banks
              
              
              -
              
              
              
              631Book
                  overdraft
              
              
              2,557
              
              
              
              2,165Accounts
                  payable
              
              
              4,878
              
              
              
              3,875Accrued
                  payroll and employee benefits
              
              
              5,024
              
              
              
              7,444Other
              
              
              7,287
              
              
              
              5,349Total
                  current liabilities
              
              
              20,329
              
              
              
              19,791Long-term
                  obligations under capital leases, less current portion
              
              
              910
              
              
              
              208Long-term
                  debt
              
              
              23,317
              
              
              
              18,177Accrued
                  pensions
              
              
              18,094
              
              
              
              18,724Accrued
                  other liabilities
              
              
              2,324
              
              
              
              1,057Postretirement
                  benefits other than pensions
              
              
              6,013
              
              
              
              6,065Asset
                  retirement obligations (ARO)
              
              
              6,586**Total
                  liabilities**
              
              
              77,573
              
              
              
              64,022**Shareholders'
                  equity**Common
                  stock, par value $0.50 per share and entitled to one
              
              
              4,558
              
              
              
              4,558vote per share: Authorized 15,000 shares, issued 9,116
                  sharesCapital
                  in excess of par value of stock
              
              
              28,737
              
              
              
              28,951Retained
                  earnings
              
              
              25,189
              
              
              
              25,028Accumulated
                  other comprehensive income
              
              
              832
              
              
              
              1,996Treasury
                  stock, at cost
              
              
              (11,721
              )
              
              
              (12,264
              )Total
                  shareholders' equity
              
              
              47,595
              
              
              
              48,269**Total
                  liabilities and shareholders' equity**
              
              $
              125,168
              
              
              $
              112,291




The
        accompanying notes are an integral part of these unaudited condensed
        consolidated financial statements.




-3-




**TASTY
                  BAKING COMPANY AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS**(Unaudited)(000's,
                  except per share amounts)**For
                  the Thirteen Weeks Ended**
              
              
              **For
                  the Thirty-Nine Weeks Ended****September
                  29, 2007**
              
              
              **September
                  30, 2006**
              
              
              **September
                  29, 2007**
              
              
              **September
                  30, 2006****Gross
                  sales**
              
              $
              69,103
              
              
              $
              66,033
              
              
              $
              209,466
              
              
              $
              203,275Less
                  discounts and allowances
              
              
              (26,584
              )
              
              
              (24,705
              )
              
              
              (78,817
              )
              
              
              (76,476
              )Net
                  sales
              
              
              42,519
              
              
              
              41,328
              
              
              
              130,649
              
              
              
              126,799**Costs
                  and expenses:**Cost
                  of sales, exclusive of depreciation shown below
              
              
              27,457
              
              
              
              26,034
              
              
              
              82,494
              
              
              
              78,454Depreciation
              
              
              2,866
              
              
              
              1,633
              
              
              
              6,909
              
              
              
              4,801Selling,
                  general and administrative
              
              
              11,745
              
              
              
              12,791
              
              
              
              37,946
              
              
              
              39,059Interest
                  expense
              
              
              467
              
              
              
              372
              
              
              
              907
              
              
              
              1,159Other
                  income, net
              
              
              (164
              )
              
              
              (221
              )
              
              
              (596
              )
              
              
              (700
              )42,371
              
              
              
              40,609
              
              
              
              127,660
              
              
              
              122,773Income
                  before provision forincome
                  taxes
              
              
              148
              
              
              
              719
              
              
              
              2,989
              
              
              
              4,026Provision
                  (Benefit) for income taxes
              
              
              (62
              )
              
              
              213
              
              
              
              960
              
              
              
              1,431**Net
                  income**
              
              $
              210
              
              
              $
              506
              
              
              $
              2,029
              
              
              $
              2,595**Average
                  common shares outstanding:**Basic
              
              
              8,034
              
              
              
              8,041
              
              
              
              8,034
              
              
              
              8,048Diluted
              
              
              8,173
              
              
              
              8,224
              
              
              
              8,148
              
              
              
              8,242**Per
                  share of common stock:**Net
                  income:Basic
              
              $
              0.03
              
              
              $
              0.06
              
              
              $
              0.25
              
              
              $
              0.32Diluted
              
              $
              0.03
              
              
              $
              0.06
              
              
              $
              0.25
              
              
              $
              0.31Cash
                  dividend
              
              $
              0.05
              
              
              $
              0.05
              
              
              $
              0.15
              
              
              $
              0.15




The
        accompanying notes are an integral part of these unaudited condensed
        consolidated financial statements.


-4-


**TASTY
                  BAKING COMPANY AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS**(Unaudited)(000's)
 **For
                  the Thirty-Nine Weeks Ended****September
                  29, 2007**
              
              
              **September
                  30, 2006****Cash
                  flows from (used for) operating activities**Net
                  income
              
              $
              2,029
              
              
              $
              2,595Adjustments
                  to reconcile net income to netcash
                  provided by operating activities:Depreciation
              
              
              6,909
              
              
              
              4,801Amortization
              
              
              239
              
              
              
              -Loss
                  (Gain) on sale of routes
              
              
              57
              
              
              
              (6
              )Restructure
                  payments
              
              
              -
              
              
              
              (222
              )Defined
                  benefit pension benefit
              
              
              (377
              )
              
              
              (9
              )Defined
                  contribution pension expense
              
              
              -
              
              
              
              1,608Pension
                  contributions
              
              
              (500
              )
              
              
              -(Increase)
                  decrease deferred taxes
              
              
              (889
              )
              
              
              50Post
                  retirement medical
              
              
              (458
              )
              
              
              (1,240
              )Other
              
              
              691
              
              
              
              304Changes
                  in assets and liabilities:Increase
                  in receivables
              
              
              (2,999
              )
              
              
              (2,384
              )Increase
                  in inventories
              
              
              (1,166
              )
              
              
              (7
              )Increase in
                  prepayments and other
              
              
              (1,685
              )
              
              
              (97
              )Increase
                  in accrued taxes
              
              
              1,166
              
              
              
              1,020Decrease
                  in accounts payable, accruedpayroll and other current liabilities
              
              
              (865
              )
              
              
              (270
              )**Net
                  cash from operating activities**
              
              
              2,152
              
              
              
              6,143**Cash
                  flows from (used for) investing activities**Proceeds
                  from sale of property, plant and equipment
              
              
              -
              
              
              
              75Purchase
                  of property, plant and equipment
              
              
              (7,098
              )
              
              
              (4,462
              )Proceeds
                  from independent sales distributor loan repayments
              
              
              2,789
              
              
              
              3,179Loans
                  to independent sales distributors
              
              
              (2,123
              )
              
              
              (2,945
              )Keystone
                  option receipt
              
              
              -
              
              
              
              1,600Other
              
              
              (242
              )
              
              
              (181
              )**Net
                  cash used for investing activities**
              
              
              (6,674
              )
              
              
              (2,734
              )**Cash
                  flows from (used for) financing activities**Dividends
                  paid
              
              
              (1,237
              )
              
              
              (1,230
              )Borrowings
                  (payments) on long-term debt, net
              
              
              6,099
              
              
              
              (1,521
              )Net
                  decrease in short-term debt
              
              
              (631
              )
              
              
              -Net
                  increase (decrease) in book overdraft
              
              
              391
              
              
              
              (604
              )Purchase
                  of treasury stock
              
              
              -
              
              
              
              (159
              )**Net
                  cash from (used for) financing activities**
              
              
              4,622
              
              
              
              (3,514
              )**Net
                  increase (decrease) in cash**
              
              
              100
              
              
              
              (105
              )Cash,
                  beginning of year
              
              
              12
              
              
              
              251Cash,
                  end of period
              
              $
              112
              
              
              $
              146**Supplemental
                  Cash Flow Information**Cash
                  paid during the period for:Interest
              
              $
              940
              
              
              $
              1,225Income
                  taxes
              
              $
              5
              
              
              $
              38




The
        accompanying notes are an integral part of these unaudited condensed
        consolidated financial statements.




-5-




**Notes
      to Condensed Consolidated Financial Statements**


($’s
      in
      000’s, except share and per share amounts, unless otherwise noted)


All
      disclosures are pre-tax, unless otherwise noted.





**1.      Summary
        of Significant Accounting Policies**





***Nature
      of the Business***


Tasty
      Baking Company (the “Company”) is a leading producer of sweet baked goods and
      one of the nation’s oldest and largest independent baking companies, in
      operation since 1914.  It has two manufacturing facilities, one in
      Philadelphia, PA, and a second in Oxford, PA.





***Fiscal
      Year***


The
      Company and its subsidiaries operate on a 52-53 week fiscal year, ending on
      the
      last Saturday of December.  Fiscal year 2007 is a 52-week
      year.  Fiscal year 2006 was a 52-week year.





***Basis
      of Presentation***


The
      condensed consolidated financial statements include the accounts of the Company
      and its subsidiaries.  All significant intercompany accounts and
      transactions have been eliminated.





The
      condensed consolidated financial statements included herein have been prepared
      by the Company pursuant to the rules and regulations of the Securities and
      Exchange Commission.  Certain information and footnote disclosures
      normally included in financial statements prepared in accordance with generally
      accepted accounting principles in the United States of America (“GAAP”) have
      been condensed or omitted pursuant to such rules and
      regulations.  In the opinion of the Company, the accompanying
      unaudited condensed consolidated interim financial statements reflect all
      adjustments, consisting of only normal recurring items, which are necessary
      for
      a fair statement of the results of operations for the periods shown.  The
      results of operations for such periods are not necessarily indicative of the
      results expected for the full year or for any future period.





The
      preparation of condensed consolidated financial statements in conformity with
      GAAP requires management to make estimates, judgments and assumptions that
      affect the reported amounts of assets, liabilities, revenues and expenses and
      related disclosure of contingent assets and liabilities.  On an ongoing
      basis, the Company evaluates its estimates, including those related to customer
      sales, discounts and allowances, long-lived asset impairment, pension and
      postretirement plan assumptions, workers’ compensation expense and income
      taxes.  Actual results may differ from these estimates.





Certain
      prior period amounts have been reclassified to conform to current period
      presentation.





***Concentration
      of
      Credit***


The
      Company encounters, in the normal course of business, exposure to concentrations
      of credit risk with respect to trade receivables.  Ongoing credit
      evaluations of customers’ financial conditions are performed and, generally, no
      collateral is required.  The Company maintains reserves for potential
      credit losses and such losses have not exceeded management’s
      expectations.





***Revenue
      Recognition***


Revenue
      is
      recognized when title and risk of loss pass, which is upon receipt of goods
      by
      the independent sales distributors, retailers or third-party
      distributors.  For route area sales, the Company sells to independent
      sales distributors who, in turn, sell to retailers.  Revenue for sales
      to independent sales distributors is recognized upon receipt of the product
      by
      the distributor.  For sales made directly to a retail customer or a
      third-party distributor, revenue is recognized upon receipt of the products
      by
      the retailer or third-party distributor.





***Sale
      of Routes***


Sales
      distribution routes are owned by independent sales distributors who purchase
      the
      exclusive right to sell and distribute Tastykake® products in defined
      geographical territories.  When the Company sells routes to
      independent sales distributors, it recognizes a gain or loss on the
      sale.  Routes sold by the Company are either existing routes that the
      Company has previously purchased from an independent sales distributor or newly
      established routes in new geographies. Any gain or loss recorded by the Company
      is based on the difference between the sales price and the carrying value of
      the
      route, and is recorded as a component of other income.  Any potential
      impairment of net carrying value is reserved as identified.  The
      Company recognizes gains or losses on sales of routes when all material services
      or conditions related to the sale have been substantially performed or satisfied
      by the Company, which is generally as of the date of sale.  In most
      cases, the Company will finance a portion of the purchase price with interest
      bearing notes, which are required to be repaid in full.  Interest
      rates on the notes are based on Treasury yields plus a spread.  The
      Company has no obligation to later repurchase a route but may choose to do
      so to
      facilitate a change in route ownership.






-6-




***Cash
      and Cash Equivalents***


The
      Company considers all investments with an original maturity of three months
      or
      less on their acquisition date to be cash equivalents.  Book
      overdrafts are recorded within current liabilities.  Cash flows
      associated with book overdrafts are classified as financing
      activities.





***Inventory
      Valuation***


Inventories,
      which include material, labor and manufacturing overhead, are stated at the
      lower of cost or market, cost being determined using the first-in, first-out
      (“FIFO”) method.  Inventory balances for raw materials, work in
      progress, and finished goods are regularly analyzed and provisions for excess
      and obsolete inventory are recorded, as necessary, based on the forecast of
      product demand and production requirements.





***Property
      and Depreciation***


Property,
      plant and equipment are carried at cost.  Depreciation is computed by
      the straight-line method over the estimated useful lives of the
      assets.  Buildings and improvements, machinery and equipment, and
      vehicles are depreciated over thirty-nine years, seven to fifteen years, and
      five to ten years, respectively, except where a shorter useful life is
      necessitated by the Company’s decision to relocate its Philadelphia
      operations.  Spare parts are capitalized as part of machinery and
      equipment and are expensed as utilized or capitalized as part of the relevant
      fixed asset.  Spare parts are valued using a moving average method and
      are reviewed for potential obsolescence on a regular basis.  Reserves
      are established for all spare parts that are no longer usable and have no fair
      market value.  Capitalized computer hardware and software are
      depreciated over five years.





Costs
      of
      major additions, replacements and betterments are capitalized, while maintenance
      and repairs, which do not improve or extend the life of the respective assets,
      are expensed as incurred.  For significant projects, the Company
      capitalizes interest and labor costs associated with the construction and
      installation of plant and equipment and significant information technology
      development projects.





In
      accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
      long-lived assets are reviewed for impairment at least annually or whenever
      events or changes in circumstances indicate that the carrying amount may not
      be
      recoverable.  In instances where the carrying amount may not be
      recoverable, the review for potential impairment utilizes estimates and
      assumptions of future cash flows directly related to the asset.  For
      assets where there is no plan for future use, the review for impairment includes
      estimates and assumptions of the fair value of the asset, which is based on
      the
      best information available.  These assets are recorded at the lower of
      their book value or fair value.





The
      Company has a conditional asset retirement obligation related to asbestos in
      its
      Philadelphia manufacturing facility. In accordance with FASB Interpretation
      No.
      47, *Accounting for Conditional Asset Retirement Obligations,*the
      Company records its obligation related to conditional asset retirements at
      the
      present value of the future obligation*.* This $6.6 million obligation
      will accrete to the full value of the future obligation over the remaining
      period until settlement of the obligation is expected to occur in June 2010,
      while the capitalized asset retirement cost is
      depreciated through  December 2044, the remaining useful life of
      the Philadelphia Manufacturing facility.





***Grants***


The
      Company receives grants from various government agencies for employee training
      purposes.  Expenses for the training are recognized in the Company’s
      income statement at the time the training takes place.  When the
      proper approvals are given and funds are received from the government agencies,
      the Company records an offset to the training expense already
      recognized.





In
      addition, in 2006, in conjunction with The Reinvestment Funds, Allegheny West
      Foundation and the Department of Community and Economic Development of the
      Commonwealth of Pennsylvania (the “DCED”), the Company activated Project Fresh
      Start (the “Project”).  The Project is an entrepreneurial development
      program that provides an opportunity for qualified minority entrepreneurs to
      purchase routes from independent sales distributors.  The source of
      grant monies for this program is the DCED.  The grants are used by
      minority applicants to partially fund their purchase of an independent sales
      distribution route.





Because
      the Project’s grant funds merely pass through the Company in its role as an
      intermediary, the Company records an offsetting asset and liability for the
      total amount of grants as they relate to the project.  There is no
      Statement of Operations impact related to the establishment of, or subsequent
      change to, the asset and liability amounts.




-7-




***Marketing
      Costs***


The
      Company expenses marketing costs, which include advertising and consumer
      promotions, as incurred or as required in accordance with Statement of Position
      93-7, *Reporting on Advertising Costs*.  Marketing costs are
      included as a part of selling, general and administrative expense.





***Computer
      Software Costs***


The
      Company capitalizes certain costs, such as software coding, installation and
      testing that are incurred to purchase or create and implement internal use
      computer software in accordance with Statement of Position 98-1, *Accounting
      for Costs of Computer Software Development or Obtained for Internal
      Use*.  The majority of the Company’s capitalized software relates
      to the implementation of the enterprise resource planning (“ERP”) and handheld
      computer systems.





***Freight,
      Shipping and Handling Costs***


Outbound
      freight, shipping and handling costs are included as a part of selling, general
      and administrative expense.  Inbound freight, shipping and handling
      costs are capitalized with inventory and expensed with cost of
      sales.





***Pension
      Plan***


The
      Company’s funding policy for the pension plan is to contribute amounts
      deductible for federal income tax purposes plus such additional amounts, if
      any,
      as the Company’s actuarial consultants advise to be appropriate.  In
      1987 the Company elected to immediately recognize all gains and losses in excess
      of the pension corridor, which is equal to the greater of ten percent of the
      accumulated pension benefit obligation or ten percent or the market-related
      value of plan assets.





The
      Company accrues normal periodic pension expense or income during the year based
      upon certain assumptions and estimates from its actuarial
      consultants.  These estimates and assumptions include discount rate,
      rate of return on plan assets, compensation increases, mortality and employee
      turnover.  In addition, the rate of return on plan assets is directly
      related to changes in the equity and credit markets, which can be very
      volatile.  The use of the above estimates and assumptions, market
      volatility and the Company’s election to immediately recognize all gains and
      losses in excess of its pension corridor in the current year may cause the
      Company to experience significant changes in its pension expense or income
      from
      year to year.  Expense or income that falls outside the corridor is
      recognized only in the fourth quarter of each year.





On
      September 29, 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement No. 158, *Employers’ Accounting for Defined Benefit Pension and
      Other Postretirement Plans* (“FAS 158”).  FAS 158 requires employers to
      recognize on their balance sheets a liability or an asset equal to the
      under-funded or over-funded status of their defined benefit plans and other
      postretirement benefit plans, respectively.  The Company adopted FAS
      158 as of its fiscal year-end, December 30, 2006.





***Accounting
      for Derivative Instruments***


The
      Company has historically entered into variable-to-fixed interest rate swap
      contracts to fix the interest rates on a portion of its variable interest rate
      debt.  These contracts are accounted for as cash flow hedges in
      accordance with FASB Statement No. 133, *Accounting for Derivative
      Instruments and Hedging Activities*.  Accordingly, these
      derivatives are marked to market and the resulting gains or losses are recorded
      in other comprehensive income as an offset to the related hedged asset or
      liability.  The actual interest expense incurred, inclusive of the
      effect of the hedge in the current period, is recorded in the Statement of
      Operations.





The
      Company has also entered into foreign currency forward contracts to hedge the
      future purchase of assets for its new facilities, which are denominated in
      Australian Dollars (“AUD”).  These contracts are accounted for as fair
      value foreign currency hedges in accordance with FASB Statement No. 133,
*Accounting for Derivative Instruments and Hedging
      Activities*.  Accordingly, the changes in fair value of both the
      commitment and the derivative instruments are recorded currently in the
      Statement of Operations, with the corresponding asset and liability recorded
      on
      the Balance Sheet.





***Treasury
      Stock***


Treasury
      stock is stated at cost. Cost is determined by the FIFO method.




-8-





***Accounting
      for Income Taxes***


The
      Company accounts for income taxes under the asset and liability method, in
      accordance with FASB Statement No. 109, *Accounting for Income
      Taxes*.  Deferred tax assets and liabilities are determined based
      on differences between financial reporting and tax bases of assets and
      liabilities and are measured using the enacted tax rates in effect when the
      differences are expected to be recovered or settled.





***Net
      Income Per Common Share***


Net
      income
      per common share is presented as basic and diluted earnings per
      share.  Net income per common share – basic is based on the weighted
      average number of common shares outstanding during the period.  Net
      income per common share – diluted is based on the weighted average number of
      common shares and dilutive potential common shares outstanding during the
      period.  Dilution is the result of outstanding stock options and
      restricted shares.  For the thirteen weeks ended September 29, 2007
      and September 30, 2006, 339,996 and 449,146 options to purchase common stock,
      respectively, were excluded from the calculation, as they were anti-dilutive.
      For the thirty-nine weeks ended September 29, 2007 and September 30, 2006,
      approximately 367,263 and 485,254 options to purchase common stock,
      respectively, were excluded from the calculation, as they were
      anti-dilutive.





***Share-based
      Compensation***


The
      Company accounts for share-based compensation in accordance with FASB Statement
      No. 123(R), *Share-Based Payment* (“FAS 123(R)”).  Share-based
      compensation expense recognized during the current period is based on the value
      of the portion of share-based payment awards that are ultimately expected to
      vest.  The total value of compensation expense for restricted stock is
      equal to the closing market price of Tasty Baking Company shares on the date
      of
      grant.  FAS 123(R) requires forfeitures to be estimated at the time of
      grant in order to estimate the amount of share-based awards that will ultimately
      vest.  The forfeiture rate is based on the Company’s historical
      forfeiture experience.  The Company calculated its historical pool of
      windfall tax benefits.





***Recent
      Accounting Statements***


In
      September 2006, the FASB issued Statement No. 157, *Fair Value
      Measurements* (“FAS 157”), which creates a single definition of fair value,
      along with a conceptual framework to measure fair value and to increase the
      consistency and the comparability in fair value measurements and in financial
      disclosure.  This statement is effective for the 2008 fiscal year,
      although early adoption is permitted.  The Company is currently
      evaluating the extent to which its current practices, financial statements
      and
      disclosures may change as a result of the adoption of FAS 157.





In
      February 2007, the FASB issued Statement No. 159, *The Fair Value Option for
      Financial Assets and Financial Liabilities – Including an Amendment of FASB
      Statement No. 115* (“FAS 159”).  This statement permits, but does
      not require, entities to measure certain financial instruments and other assets
      and liabilities at fair value on an instrument-by-instrument basis and is
      irrevocable.  At the adoption date, unrealized gains and losses on
      financial assets and liabilities for which the fair value option has been
      elected would be reported as a cumulative adjustment to beginning retained
      earnings. Unrealized gains and losses due to changes in their fair value must
      be
      recognized in earnings at each subsequent reporting date.  This
      statement is effective for fiscal years beginning after November 15,
      2007.  The Company is currently evaluating the extent to which its
      current practices, financial statements and disclosures may change as a result
      of the adoption of FAS 159.





**2.      New
        Facilities**





In
      May
      2007 the Company announced that as part of its comprehensive operational review
      of strategic manufacturing alternatives, it entered into an agreement to
      relocate its Philadelphia operations to the Philadelphia Navy
      Yard.  This agreement provides for a 26-year lease for a yet to be
      constructed 345,500 square foot bakery, warehouse and distribution center
      located on approximately 25 acres.  Site preparation has begun and
      construction is expected to be completed by the end of 2009.  The
      Company expects the new facility to be fully operational in 2010.  The
      lease provides for no rent payments in the first year of
      occupancy.  Rental payments increase from $3.5 million in the second
      year of occupancy to $7.2 million in the final year of the lease.





As
      part of
      this initiative, the Company also entered into a 16-year agreement for $9.5
      million in financing at a fixed rate of 8.54% to be used for leasehold
      improvements.  This agreement provides for no principal or interest
      payments in the first year of occupancy and then requires equal monthly payments
      of principal and interest aggregating to $1.2 million annually over the
      remainder of the term.





The
      Company also entered into an agreement to relocate its corporate headquarters
      to
      the Philadelphia Navy Yard.  This lease agreement provides for not
      less than 35,000 square feet of office space that commences upon the later
      of
      substantial completion of the office space or April 2009, and which ends
      coterminous with the new bakery lease.  The lease provides for no rent
      payment in the first six months of occupancy.  Rental payments
      increase from approximately $0.9 million in the second year of occupancy to
      approximately $1.6 million in the final year of the lease.




-9-




In
      connection with these agreements, the Company has provided a $1.1 million letter
      of credit, which will increase to $8.1 million by the beginning of
      2009.  The outstanding amount of the letter of credit will be reduced
      starting in year 17 and will be eliminated by the end of the lease
      term.





In
      addition to the facility leases, the Company expects to purchase high-tech,
      modern baking equipment.  This equipment is designed to increase
      product development flexibility and efficiency, while maintaining existing
      taste
      and quality standards.  The investment for this project, in addition
      to any costs associated with the agreements described above, is projected to
      be
      approximately $75 million through 2010.  In September 2007, the
      Company closed on a $90 million multi-bank credit facility and $27 million
      in
      low-interest development loans provided in part by the Commonwealth of
      Pennsylvania and the Philadelphia Industrial Development Corporation to finance
      this investment and refinance the Company’s existing revolving credit
      facilities, as well as to provide for financial flexibility in running the
      ongoing operations and working capital needs.  The Company also
      received a commitment for an additional $5 million low-interest development
      loan
      that it expects to close in September 2008.





The
      Company anticipates that long-lived assets utilized in the Philadelphia
      operations with an aggregate net book value of approximately $20 million at
      June
      30, 2007 would not be relocated to the new facilities or sold as a result of
      the
      relocation. The Company accounts for disposal and exit activities in accordance
      with FAS 146, *Accounting for Costs Associated with Exit or Disposal
      Activities* (“FAS 146”) and FAS 144, *Accounting for the Impairment or
      Disposal of Long-Lived Assets* (“FAS 144”). To date, the Company has not
      incurred any material obligations related to one-time termination benefits,
      contract termination costs or other associated costs as described in FAS
      146.





The
      Company has re-evaluated the long-lived assets utilized in its Philadelphia
      operations for potential impairment or other treatment in accordance with FAS
      144.  Based on the commitment to the planned relocation, neither the
      assets to be relocated nor the assets to be left in place at the Philadelphia
      operations have suffered impairment.  Therefore the estimated fair
      value of the asset groups continues to exceed the carrying amount of such asset
      groups.  With respect to the group of assets not expected to be
      relocated or sold, certain of the assets included in the group had previously
      estimated useful lives that extended beyond the expected project completion
      in
      early 2010.  As such, in the quarter ended June 29, 2007, the Company
      changed its estimate of the remaining useful lives of such assets to be
      consistent with the time remaining until the end of the project, and accounted
      for such change in estimate in accordance with FAS 154, *Accounting Changes
      and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement
      No. 3.*For the thirteen and thirty-nine week periods ended
      September 29, 2007 the change in estimated useful lives of these assets resulted
      in incremental depreciation of $1.3 million and $2.0 million,
      respectively.  The after tax impact of the incremental depreciation on
      net income, net income per common share-basic, and net income per common
      share-diluted was $0.9 million, $0.11 per share, and $0.11 per share,
      respectively, for the thirteen weeks ended September 29, 2007 and $1.3 million,
      $0.16 per share, and $0.16 per share, respectively, for the thirty-nine weeks
      ended September 29, 2007.  The Company expects that the future pre-tax
      impact of incremental depreciation resulting from the change in useful lives
      will be approximately $1.3 million per quarter through June 2010, when the
      new
      bakery is expected to be fully operational.





As
      part of
      the relocation of its Philadelphia operations, the Company expects to eliminate
      approximately 215 positions.  While the Company hopes to achieve this
      result through normal attrition and the reduction of contract labor, it is
      probable that the Company will incur obligations related to post employment
      benefits accounted for under FAS 112, *Employers' Accounting for
      Postemployment Benefits, an amendment of FASB Statements No. 5 and
      43*.  Due to uncertainties regarding the extent to which the
      Company will be successful in managing the reductions through normal attrition
      and the reduction of contract labor, the Company cannot reasonably estimate
      the
      amount of such obligations or provide a meaningful range of loss with respect
      to
      such obligations at this time.





**3.      Restructure
        Charges**





From
        fiscal years 2001 to 2005, the Company implemented several strategies that
        resulted in restructuring charges and accrued restructuring
        obligations.  During the thirty-nine week period ended September 30,
        2006, the Company made payments related to restructuring obligations of $222
        and
        as of December 30, 2006 no restructuring obligations remained.




-10-


**4.      Inventories**





Inventories
        are classified as follows:


**Sept.
                  29,
                  2007**
              
              
              **Dec.
                  30, 2006**Finished
                  goods
              
              $
              2,122
              
              
              $
              1,575Work
                  in progress
              
              
              186
              
              
              
              159Raw
                  materials and supplies
              
              
              5,785
              
              
              
              5,192$
              8,093
              
              
              $
              6,926




The
      inventory balance has been reduced by reserves for obsolete and slow-moving
      inventories of $126 and $78 as of September 29, 2007 and December 30, 2006,
      respectively.


**5.      Credit
        Facility**





On
      September 6, 2007, the Company entered into a 5 year, $100 million secured
      credit facility, consisting of a $55 million fixed asset line of credit, a
      $35
      million working capital revolver and a $10 million low-interest loan from the
      agent bank in partnership with the Commonwealth of Pennsylvania (the “Bank
      Credit Facility”). The Bank Credit Facility contains various non-financial and
      financial covenants, including a fixed charge coverage covenant, a funded debt
      covenant and a minimum liquidity ratio and level of earnings before depreciation
      and amortization (“EBITDA”) covenant.  Interest rates for the fixed
      asset line of credit and working capital revolver are indexed to LIBOR and
      include a spread above that index from 75 to 275 basis points based upon the
      Company’s ratio of debt to EBITDA. The fixed asset line of credit and the
      working capital revolver include commitment fees from 20 to 50 basis points
      based upon the Company’s ratio of debt to EBITDA.  The $10 million
      low-interest loan bears interest at a fixed rate of 5.5% per annum.





On
      September 6, 2007, the Company entered into a 10 year, $12 million credit
      agreement with the PIDC Local Development Corporation (“PIDC Credit Facility”).
      This credit facility bears interest at a blended fixed rate of 4.5% per annum
      and contains customary representations and warranties as well as customary
      affirmative and negative covenants essentially similar to those in the Bank
      Credit Facility.  Negative covenants include, among others,
      limitations on incurrence of liens and secured indebtedness by the Company
      and/or its subsidiaries, other than in connection with the Bank Credit Facility
      and the MELF Line of Credit.





On
      September 6, 2007, the Company entered into a 10 year, $5 million Machinery
      and
      Equipment Loan Fund line of credit with the Commonwealth of Pennsylvania (“MELF
      Line of Credit”). This line of credit bears interest at a fixed rate of 5.0% per
      annum and contains customary representations and warranties as well as customary
      affirmative and negative covenants.  Negative covenants include, among
      others, limitations on incurrence of liens and secured indebtedness by the
      Company, other than in connection with the Bank Credit Facility and the PIDC
      Credit Facility. Contemporaneously with the closing under the MELF Line of
      Credit, the Company received a commitment from the Commonwealth of Pennsylvania
      Machinery and Equipment Loan Fund to extend a second $5 million line of credit
      to the Company.  This second line of credit with the Machinery and
      Equipment Loan Fund is expected to close in September 2008, and be on
      substantially the same terms and conditions as the MELF Line of
      Credit.





On
      September 6, 2007 the Company entered into an agreement which governs the
      collateral positions under the Bank Credit Facility, the PIDC Credit Facility,
      and the MELF line of credit (“the Intercreditor Agreement”), and establishes the
      priorities and procedures that each lender has in enforcing the terms and
      conditions of each of their respective agreements.  The Intercreditor
      Agreement permits the group of banks in the Bank Credit Facility to have the
      initial responsibility to enforce the terms and conditions of the various credit
      agreements, subject to certain specific limitations, and allows such bank group
      to negotiate amendments and waivers on behalf of all lenders, subject to the
      approval of each lender.





The
      Company used a portion of the proceeds received under the Bank Credit
      Facility to terminate and repay all outstanding indebtedness under the
      Amended Credit Agreement, the Term Loan, the Mortgage, and the Second Term
      Loan.  The Company also expects to utilize proceeds from the Bank
      Credit Facility, the PIDC Credit Facility and the MELF Line of Credit to finance
      the Company’s move of its Philadelphia manufacturing facility and corporate
      headquarters to new facilities to be constructed at the Philadelphia Navy
      Yard, along with working capital needs.




-11-




On
      September 13, 2005, the Company entered into the Amended and Restated Credit
      Agreement (“Amended Credit Agreement”).  The Amended Credit Agreement
      increased the commitment from $30 million to $35 million; changed the terms
      from
      secured to unsecured; extended the maturity from a three-year term to a
      five-year term expiring in September 2010; eliminated the short-term portion
      and
      reduced the interest rate margins and the commitment fees charged to the Company
      as described in the Amended Credit Agreement.  Modifications were also
      made to the Tangible Net Worth covenant and the Funded Debt covenant that make
      them less restrictive.  Interest rates in the Amended Credit Agreement
      are indexed to LIBOR based upon the Company’s ratio of debt to EBITDA and rates
      may decrease up to 50 basis points based on that ratio.  Commitment
      fees are charged on the unused portion of the commitment and range from 10
      to 25
      basis points based upon the same ratio used to determine interest
      rates.  The proceeds from the Amended Credit Agreement will be used
      for general corporate purposes and such other uses as permitted.





On
      September 13, 2005, the Company also entered into a term loan for $5.3 million
      (the “Term Loan”).  The term loan was based upon a 15 year
      amortization with a scheduled maturity in five years due in September
      2010.  The terms and conditions of the term loan are generally the
      same as those in the Amended Credit Agreement.  The entire proceeds of
      the term loan were used to fund a voluntary contribution to the defined benefit
      pension plan (the “DB Plan”).





On
      December 19, 2005, the Company also entered into a mortgage loan of $2.15
      million (the “Mortgage Loan”) which was secured by the Philadelphia
      manufacturing facility (“Hunting Park Bakery”), and a second term loan for $2.55
      (the “Second Term Loan”) million to fund the purchase of the Hunting Park Bakery
      building and land for a total purchase price of $4.7 million from the Company’s
      DB Plan.  The mortgage loan is based upon a 20 year amortization with
      a scheduled maturity in ten years due in December 2015.  The term loan
      is based upon a 15 year amortization with a scheduled maturity in five years
      due
      in September 2010.  The terms and conditions of the mortgage loan and
      the term loan are generally the same as those in the Amended Credit
      Agreement.





**6.      Derivative
        Instruments**





In
      order
      to hedge a portion of the Company’s exposure to changes in interest rates the
      Company entered into a five-year $6 million interest rate swap on August 3,
      2005, with a fixed LIBOR rate of 4.64%.  The Company also entered into
      two five-year interest rate swaps for its term loans for $5.3 and $2.55 million
      on September 13 and December 21, 2005 with fixed LIBOR rates of 4.42% and 4.99%,
      respectively.  Also on December 21, 2005 the Company entered into a
      ten-year $2.15 million interest rate swap for its mortgage loan with a fixed
      LIBOR rate of 5.08%.  The LIBOR rates above were subject to an
      additional credit spread which could range from 75 basis points to 140 basis
      points.





In
      June
      2007, in connection with the planned relocation of the Company’s Philadelphia
      operations and the related financing, the Company sold the August 3, 2005 and
      September 13, 2005 interest rate swaps.  In September 2007, the
      Company sold its remaining interest rate swaps. The effect of these sales was
      to
      increase interest expense for the thirteen weeks ended September 29, 2007 by
      approximately $0.1 million and to reduce interest expense for the thirty-nine
      weeks ended September 29, 2007 by approximately $0.1 million.





During
      the
      third quarter of 2007, the Company entered into commitments to acquire assets
      denominated in a foreign currency.  In order to hedge the Company’s
      exposure to changes in foreign currency rates, the Company entered into foreign
      currency forward contracts with maturity dates ranging from July 2007 to April
      2010 with notional principal of $9.0 million AUD ($7.2 million USD as of
      September 29, 2007).  As of September 29, 2007 the change in fair
      value of both the commitment and the forward currency contracts was $0.5
      million.




**7.      Defined
        Benefit Retirement Plans**





The
      Company maintains a partially funded noncontributory DB Plan providing
      retirement benefits.  Benefits under this DB Plan generally are based
      on the employees’ years of service and compensation during the years preceding
      retirement. The Company maintains a defined benefit salaried employee retirement
      plan (the “DB SERP”) for key employees designated by the Board of Directors,
      however, there are no current employees earning benefits under this
      plan.  See Note 10 for more information.  The Company also
      maintains an unfunded Directors’ Retirement Plan.  The benefit amount
      is the annual retainer in the year of retirement.





Effective
      February 15, 2007, benefit accruals under the Directors’ Retirement Plan were
      frozen for current directors and future directors were precluded from
      participating in the plan.  Participants are credited for service
      under the Directors’ Retirement Plan after February 15, 2007 solely for vesting
      purposes.  On February 15, 2007, the Board of Directors approved a
      Deferred Stock Unit Plan (the “DSU Plan”).  The DSU Plan provides that
      for each fiscal quarter, the Company will credit deferred stock units (“DSUs”)
      to each director’s account equivalent in value to $4 on the last day of such
      quarter, provided that he or she is a director on the last day of such
      quarter.  Directors will be entitled to be paid shares in an amount
      equal to the aggregate DSUs in the director’s account upon termination of Board
      service provided the director has at least five years of continuous service
      on
      the Board.  The shares may be paid out in a lump sum, or at the
      director’s election, over a period of five years.





-12-




In
      December 2004, the Company announced to its employees that it was amending
      the
      DB Plan to freeze benefit accruals effective March 26,
      2005.  Effective March 27, 2005, the Company adopted a new company
      funded defined contribution plan (the “DC Plan”) which is a defined contribution
      benefit that replaces the benefit provided in the DB Plan.


The
      components of the DB Plan, DB SERP, and DB Directors’ Retirement Plan’s costs
      are summarized as follows:




**Thirteen
                  Weeks Ended**
              
              
              **Thirty-nine
                  Weeks Ended****9/29/07**
              
              
              **9/30/06**
              
              
              **9/29/07**
              
              
              **9/30/06**Service
                  cost-benefits earned during the quarter
              
              $
              0
              
              
              $
              10
              
              
              $
              10
              
              
              $
              22Interest
                  cost on projected benefit obligation
              
              
              1,247
              
              
              
              1,237
              
              
              
              3,735
              
              
              
              3,721Expected
                  return on plan assets
              
              
              (1,302
              )
              
              
              (1,277
              )
              
              
              (3,906
              )
              
              
              (3,811
              )Prior
                  service cost amortization
              
              
              (4
              )
              
              
              (4
              )
              
              
              (13
              )
              
              
              (12
              )Actuarial
                  loss recognition
              
              
              16
              
              
              
              -
              
              
              
              49
              
              
              
              -SERP
                  amendment
              
              
              -
              
              
              
              18
              
              
              
              -
              
              
              
              70Net
                  DB pension amount charge to income
              
              $
              (43
              )
              
              $
              (16
              )
              
              $
              (125
              )
              
              $
              (10
              )




The
      Company made a $0.5 million voluntary cash contribution to the previously frozen
      DB Plan in July 2007.








**8.      Defined
        Contribution Retirement Plans**





The
      Company maintains a funded retirement DC Plan, which is a defined contribution
      benefit plan that replaced the benefits provided in the DB
      Plan.  Under the DC Plan, the Company makes weekly cash contributions
      into individual accounts for all eligible employees.  These
      contributions are based on employees’ point values which are the sum of age and
      years of service as of January 1 each year.  All employees receive
      contributions that range from 2% to 5% of eligible compensation relative to
      their point totals.  Employees at March 27, 2005, who had 20 years of
      service or 10 years of service and 60 points, received an additional
“grandfathered” contribution of between 1.5% and 3.5% of salary.  The
“grandfathered” contribution percentage was fixed as of March 27, 2005, and is
      paid weekly with the regular contribution until those covered employees retire
      or separate from the Company.  These “grandfathered” contributions are
      being made to compensate older employees for the shorter earnings period that
      their accounts will have to appreciate in value relative to their normal
      retirement dates.





The
      Company also maintains the Tasty Baking Company 401(k) and Company Funded
      Retirement Plan (“Retirement Plan”).  In the Retirement Plan, all
      participants receive a company match of 50% of their elective deferrals that
      do
      not exceed 4% of their compensation as defined in the Retirement
      Plan.  Under the Retirement Plan, the waiting period for participation
      has been eliminated and participants are offered a broad array of investment
      choices.





The
      Company also maintains an unfunded defined contribution SERP (“DC SERP”) for one
      eligible active employee.





Components
      of DC pension amount charged to income:




**Thirteen
                  Weeks
                  Ended**
              
              
              **Thirty-nine
                  Weeks Ended****9/29/07**
              
              
              **9/30/06**
              
              
              **9/29/07**
              
              
              **9/30/06**Funded
                  retirement plan
              
              $
              465
              
              
              $
              461
              
              
              $
              1,445
              
              
              $
              1,395Defined
                  contribution SERP
              
              
              90
              
              
              
              71
              
              
              
              270
              
              
              
              213Net
                  DC pension amount charge to income
              
              $
              555
              
              
              $
              532
              
              
              $
              1,715
              
              
              $
              1,608




There
      is
      no required minimum cash contribution to the Pension Plan in 2007.




**9.      Postretirement
        Benefits Other than Pensions**





In
      addition to providing pension benefits, the Company also provides certain
      unfunded health care and life insurance programs for substantially all retired
      employees, or Other Postretirement Benefits (OPEB).  These benefits
      are provided through contracts with insurance companies and health service
      providers.  In 2005, the Company amended the medical benefits paid for
      retirees by eliminating coverage for most post-65 retirees as of January 1,
      2006.  Coverage is maintained for all pre-65 retirees and for certain
      post-65 retirees who had qualifying dependents that were
      pre-65.  Simultaneous with the change in medical coverage, life
      insurance for incumbent retirees at company group rates was capped at $20 of
      coverage.  Incumbent retirees who purchase coverage in excess of $20
      and all new retirees after January 1, 2006 pay age-based rates for their life
      insurance benefit.




-13-




Components
      of net periodic postretirement benefit cost/(benefit) are as
      follows:




**Thirteen
                  Weeks
                  Ended**
              
              
              **Thirty-nine
                  Weeks Ended****9/29/07**
              
              
              **9/30/06**
              
              
              **9/29/07**
              
              
              **9/30/06**Service
                  cost
              
              $
              67
              
              
              $
              75
              
              
              $
              201
              
              
              $
              200Interest
                  cost
              
              
              92
              
              
              
              91
              
              
              
              277
              
              
              
              272Amortization
                  of unrecognized prior service cost
              
              
              (457
              )
              
              
              (550
              )
              
              
              (1,373
              )
              
              
              (1,372
              )Amortization
                  of unrecognized gain
              
              
              (29
              )
              
              
              (19
              )
              
              
              (87
              )
              
              
              (78
              )
 Total
                  FAS 106 net postretirement benefit
              
              $
              (327
              )
              
              $
              (403
              )
              
              $
              (982
              )
              
              $
              (978
              )




Estimated
      company contributions for the thirty-nine weeks ended September 29, 2007 and
      September 30, 2006 were $453 and $253, respectively.


**10.           Stock
        Compensation**





At
      the
      2006 Annual Meeting of Shareholders of the Company held on May 11, 2006, the
      Company's shareholders approved the Tasty Baking Company 2006 Long-Term
      Incentive Plan (the "2006 Plan"), as adopted by the Company's Board of Directors
      (the "Board") on March 24, 2006.  The aggregate number of shares
      available for grant under the 2006 Plan is 290,557 shares of the Company’s
      common stock.





The
      2006
      Plan authorizes the Compensation Committee (the "Committee") of the Board to
      grant awards of stock options, stock appreciation rights, unrestricted stock,
      restricted stock (“RSA”) (including performance restricted stock) and
      performance shares to employees, directors and consultants or advisors of the
      Company.  The option price is determined by the Committee and, in the
      case of incentive stock options, will be no less than the fair market value
      of
      the shares on the date of grant.  Options lapse at the earlier of the
      expiration of the option term specified by the Committee (not more than ten
      years in the case of incentive stock options) or three months following the
      date
      on which employment with the Company terminates.





The
      Company also has active 2003 and 1997 Long-Term Incentive Plans.  The
      aggregate number of shares available for grant under the 2003 plan is 60,744
      and
      under the 1997 plan is 107,547.  The terms and conditions of the 2003
      and 1997 plans are generally the same as the 2006 Plan.  A notable
      difference is that the 1997 plan can only award shares to employees of the
      Company while the 2003 plan can award shares to employees and directors of
      the
      Company.  The Company also has options outstanding under the 1994
      Long-Term Incentive Plan, the terms and conditions of which are similar to
      the
      1997 Long-Term Incentive Plan.





On
      December 16, 2005, the Board and the Committee approved the acceleration of
      vesting of all outstanding, unvested stock options previously awarded to the
      Company’s employees, officers (including executive officers) and directors under
      the Company’s 1994, 1997 and 2003 Long-Term Incentive Plans.  All
      other terms and conditions applicable to these stock options, including exercise
      prices and holding period requirements, remain unchanged.  All
      unvested stock options were “out-of-the-money” as of the closing stock price on
      December 16, 2005, with a range of exercise prices from $7.55 to $11.30 per
      share.  As a result of the acceleration, stock options to acquire
      approximately 173,167 shares of the Company’s common stock became exercisable on
      December 31, 2005, 85% of which were scheduled to vest during
      2006.  Of the total number of shares underlying the accelerated stock
      options, approximately 27,998 were held by directors and 114,394 were held
      by
      executive officers.  The Company had previously imposed a five-year
      holding period requirement on any shares obtained through the exercise of
      options awarded on or after August 7, 2003, which was expected to prevent
      unintended benefits to the holders of the majority of these stock options as
      a
      result of the accelerated vesting.  Only 35,000 of the options are not
      subject to this requirement, with the lowest exercise price on those options
      set
      at $8.60 per share.





The
      purpose of the accelerated vesting was to enable the Company to avoid
      recognizing compensation expense associated with the stock options in future
      periods as required by FAS 123(R), *Share Based Payment*, which the
      Company adopted by January 1, 2006.  As a result of the acceleration
      of vesting, the Company reduced the non-cash, pre-tax compensation expense
      it
      would otherwise have been required to record by approximately $410 over the
      original option vesting period, including approximately $360 in fiscal
      2006.




-14-


Notwithstanding
      the vesting and termination provisions described above, under the terms of
      the
      Change of Control Agreements and Employment Agreements that the Company entered
      into with certain executive officers, upon a change of control, the shares
      granted as RSAs vest and any restrictions on outstanding stock options lapse
      immediately.  Additionally, under the terms of those agreements, in
      certain change of control circumstances, shares granted as RSAs may vest after
      termination of employment.





A
      summary
      of stock options as of September 29, 2007 is presented below:


**Shares
                  (000’s)**
              
              
              **Weighted-Average****Exercise
                  Price**
              
              
              **Weighted-Average****Remaining
                  Contractual Term**
              
              
              **Aggregate
                      Intrinsic****Value
                    (000s)**Outstanding
                  at December 30, 2006
              
              
              456
              
              
              $
              10.52Granted
              
              
              -
              
              
              
              -Forfeited
              
              
              (5
              )
              
              
              10.78Exercised
              
              
              -
              
              
              
              -Outstanding
                  at March 31, 2007
              
              
              451
              
              
              $
              10.52
              
              
              
              5.55
              
              
              $
              1,087Granted
              
              
              -
              
              
              
              -Forfeited
              
              
              (5
              )
              
              
              10.78Exercised
              
              
              -
              
              
              
              -Outstanding
                  at June 30, 2007
              
              
              446
              
              
              $
              10.52
              
              
              
              5.31
              
              
              $
              1,075Granted
              
              
              -
              
              
              
              -Forfeited
              
              
              (1
              )
              
              
              10.78Exercised
              
              
              -
              
              
              
              -Outstanding
                  at September 29, 2007
              
              
              445
              
              
              $
              10.51
              
              
              
              5.09
              
              
              $
              1,074Options
                  exercisable at March 31, 2007
              
              
              451
              
              
              $
              10.52
              
              
              
              5.55
              
              
              $
              1,087Options
                  exercisable at June 30, 2007
              
              
              446
              
              
              $
              10.52
              
              
              
              5.31
              
              
              $
              1,075Options
                  exercisableatSept.
                  29, 2007
              
              
              445
              
              
              $
              10.51
              
              
              
              5.09
              
              
              $
              1,074




As
      of
      September 29, 2007, there was no unrecognized compensation related to nonvested
      stock options.  For the thirty-nine weeks ended September 29, 2007,
      there were no options granted and there was no cash received from option
      exercises.  There was no compensation expense recognized in the
      Condensed Consolidated Statements of Operations for stock options in the
      thirty-nine weeks ended September 29, 2007 or September 30, 2006.





The
      Company recognizes expense for restricted stock using the straight-line method
      over the requisite service period.  A summary of the restricted stock
      as of September 29, 2007 is presented below:


**Shares
                  (000’s)**
              
              
              **Weighted–Average
                  Fair Value**Nonvested
                  at December 30, 2006
              
              
              180
              
              
              $
              7.65Granted
              
              
              50
              
              
              
              8.70Forfeited
              
              
              (1
              )
              
              
              8.03Exercised
              
              
              -
              
              
              
              -Nonvested
                  at September 29, 2007
              
              
              229
              
              
              $
              7.88




As
      of
      September 29, 2007, there was $980 of unrecognized compensation cost related
      to
      nonvested restricted stock which is expected to be recognized over a
      weighted-average period of approximately 2.81 years.




**11.           Income
        Taxes**





In
      June
      2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), *Accounting for
      Uncertain Tax Positions, an Interpretation of FAS 109.*FIN 48 establishes a
      single model to address accounting for uncertain tax positions.  FIN
      48 clarifies the accounting for income taxes by prescribing a minimum
      recognition threshold a tax position is required to meet before being recognized
      in the financial statements.  FIN 48 also provides guidance on
      derecognition, measurement classification, interest and penalties, accounting
      in
      interim periods, disclosure and transition.  Upon adoption, the
      Company increased its reserves for uncertain tax positions by recognizing a
      charge of approximately $631 to the December 31, 2006 beginning retained
      earnings balance.




-15-




At
      the
      adoption date of December 31, 2006, the Company had $835 of unrecognized tax
      benefits, including $402 of interest and penalties, all of which would affect
      the effective tax rate if recognized.  At September 29, 2007, the
      Company has $908 of unrecognized tax benefits, $227 of which are presented
      as a
      reduction in deferred tax assets.  The Company recognizes potential
      interest and penalties related to unrecognized tax benefits in income tax
      expense, and at September 29, 2007, had $400 of interest and penalties included
      as a component of unrecognized tax benefits.





The
      Company is subject to U.S. federal income tax as well as income tax of multiple
      state jurisdictions. The Company has substantially concluded all U.S. federal
      income tax matters for years through 2002. Substantially all material state
      income tax matters have been concluded through 2001.  Currently there
      are no ongoing income tax audits for any of the tax years that remain open
      to
      examination by various taxing jurisdictions.  The Company does not
      anticipate that total unrecognized tax benefits will significantly change due
      to
      the expiration of the statute of limitations with respect to any open tax year
      prior to September 29, 2008.





During
      the
      quarter ended September 29, 2007, the Company recorded $67 in tax benefits
      related to changes in cumulative temporary timing differences.




**12.           Comprehensive
        Income/(Loss)**





Total
      comprehensive income, net of taxes, is comprised as follows:




**Thirteen
                  Weeks
                  Ended**
              
              
              **Thirty-nine
                  Weeks
                  Ended****9/29/07**
              
              
              **9/30/06**
              
              
              **9/29/07**
              
              
              **9/30/06**Net
                  income
              
              $
              210
              
              
              $
              506
              
              
              $
              2,029
              
              
              $
              2,595Other
                  comprehensive income / (loss)Pension
                  plan
              
              
              16
              
              
              
              -
              
              
              
              31
              
              
              
              -Other
                  postretirement benefits
              
              
              (584
              )
              
              
              -
              
              
              
              (1,130
              )
              
              
              -Change
                  in unrealized gain / (loss)on derivative instruments
              
              
              (34
              )
              
              
              (264
              )
              
              
              (65
              )
              
              
              37Total
                  other comprehensive income / (loss)
              
              
              (602
              )
              
              
              (264
              )
              
              
              (1,164
              )
              
              
              37Total
                  comprehensive income / (loss)
              
              $
              (392
              )
              
              $
              242
              
              
              $
              865
              
              
              $
              2,632The
                  following table summarizes the components of accumulated other
                  comprehensive income / (loss), net of tax:**Sept.
                  29,**
              
              
              **December
                  30,****2007**
              
              
              **2006**Pension
                  Plan
              
              
              
              
              
              
              
              
              
              $
              (3,481
              )
              
              $
              (3,511
              )Unrealized
                  gain / (loss) on derivative instruments
              
              
              
              
              
              
              
              
              
              
              20
              
              
              
              84Other
                  postretirement benefits
              
              
              
              
              
              
              
              
              
              
              4,293
              
              
              
              5,423Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              $
              832
              
              
              $
              1,996


**13.           Facility
        Fire**





In
      July
      2007, the Company had a fire at its Philadelphia bakery
      operations.  As a result of the fire the Company incurred
      approximately $0.2 million in costs which are included in cost of sales for
      the
      thirteen and thirty-nine weeks ended September 29, 2007.  While the
      Company has filed an insurance claim for this loss, no receivable has been
      recorded as of September 29, 2007.




-16-




**Item
      2.              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations**


($’s
      in
      000’s, except share and per share amounts unless otherwise noted)


All
      disclosures are pre-tax, unless otherwise noted.





**Results
      of Operations**




**For
      the Thirteen Weeks ended September 29, 2007 and September 30,
      2006**





**Overview**





Net
      income
      for the third quarter of 2007 was $210 or $0.03 per fully-diluted
      share.  Net income included $0.9 million, or $0.11 per common share,
      of incremental depreciation, after-tax, resulting from the change in the
      estimated useful lives of certain assets at the Company’s Philadelphia
      operations in the second quarter of fiscal 2007.  The change in
      estimated useful lives resulted from the Company’s plans to move from its
      present facilities.  Net income for the third quarter of 2006 was $506
      or $0.06 per fully-diluted share.  Net income for the third quarter of
      2007 decreased $296 and earnings per share decreased $0.03, compared to the
      same
      quarter last year.





**Sales**





Gross
      sales and net sales increased 4.6% and 2.9%, respectively, in the third quarter
      of 2007 versus the same period in the prior year due to a 1.5% volume increase,
      combined with higher average selling prices.  Route and non-route net
      sales increased 3.3% and 1.6%, respectively, versus the same period in
      2006.    Route net sales grew due to strong family pack
      sales and continued success of the company’s sugar-free Sens*ables*products, partially offset by a decline in single serve sales.





**Cost
      of Sales**





Cost
      of
      sales for the third quarter of 2007 increased 5.5% versus the third quarter
      of
      2006.  The increase in cost of sales resulted from higher sales volume
      and, more significantly, by a 12.5% increase in variable manufacturing expenses,
      which was primarily driven by industry-wide cost increases for packaging and
      certain key ingredients, including sugar, oils, and eggs. The increase in
      variable manufacturing expense was partially offset by an 8.3% reduction in
      fixed manufacturing expense in the quarter due to lower employee-related costs,
      due in part to changes in the Company’s vacation benefit plan.





**Gross
      Margin**





Gross
      margin decreased 4.4 percentage points to 28.7% of net sales in the third
      quarter of 2007 compared to the third quarter of 2006.  The decline in
      gross margin was partly attributable to the $1,309 in incremental depreciation
      resulting from a change in the estimated useful lives of certain assets
      described previously at the Company’s Philadelphia operations related to the
      Company’s plans to move from its present facilities.  The incremental
      depreciation resulted in a 3.1 percentage point reduction in gross
      margin.  The increased cost of commodities also negatively impacted
      gross margin as did an unfavorable product mix shift between family pack and
      single serve products compared to the same quarter of 2006.





**Selling,
      General and Administrative Expenses**





Selling,
      general and administrative expenses for the third quarter of 2007 decreased
      to
      27.6% of net sales, compared to 30.9% of net sales in the third quarter of
      2006.  The decrease was driven by a reduction in advertising
      expenses, combined with lower employee-related expenses, due in large part
      to
      changes in the Company’s vacation benefit plan.





**Non-Operating
      Items**





Interest
      expense increased by $95, or 25.5%, in the third quarter of 2007 compared to
      the
      third quarter of 2006.  The increase was primarily due to a $68 loss
      on the sale of certain interest rate swaps resulting from changes in the
      Company’s underlying debt structure as part of the financing of the new
      manufacturing plant, combined with higher deferred financing fee amortization
      related to the Company’s new debt facilities.   The Company is
      exposed to market risk relative to its interest expense as certain
      of  its notes payable and long-term debt have floating interest rates
      that vary with the conditions of the credit market.





-17-


Other
      income, net, decreased by $57 in the third quarter of 2007 compared to the
      third
      quarter of 2006.    The decrease was primarily due to a loss
      on the sale of equipment in the quarter ended September 29, 2007.





The
      effective income tax rate for state and federal taxes was (41.9%) and 29.6%
      for
      the thirteen weeks ended September 29, 2007 and September 30, 2006,
      respectively.  The favorable change in the effective tax rate was
      primarily driven by $67 in benefits in the thirteen weeks ended September 29,
      2007 related to changes in cumulative temporary timing differences.





**For
      the Thirty-nine Weeks ended September 29, 2007 and September 30,
      2006**





**Overview**





Net
      income
      for the first thirty-nine weeks ended September 29, 2007, was $2,029 or $0.25
      per fully-diluted share. Net income included $1.3 million or $0.16 per common
      share of after tax impact of incremental depreciation resulting from a change
      in
      the estimated useful lives of certain assets at the Company’s Philadelphia
      operations.  The change in estimated useful lives resulted from the
      Company’s plans to move from its present facilities. Net income for the first
      thirty-nine weeks ended September 30, 2006, was $2,595, or $0.31 per
      fully-diluted share.  Net income for the first thirty-nine weeks of
      2007 decreased $566 and earnings per share decreased $0.06 compared to the
      same
      period last year.





**Sales**





Gross
      sales and net sales both increased 3.0% in the first thirty-nine weeks of 2007
      versus the same period in the prior year due primarily to a 2.7% volume
      increase.  Route net sales increased 2.5% versus the same period in
      2006 driven by increased family pack sales, partially offset by a decline in
      single serve sales.  Non-route net sales increased 4.8% versus the
      same period a year ago primarily driven by expanded distribution among
      third-party distributors and growth within certain existing direct
      customers.





**Cost
      of Sales**





Cost
      of
      sales for the first thirty-nine weeks of 2007 increased 5.1% versus the same
      period a year ago.  The increase in cost of sales resulted from
      increased volume and industry-wide cost increases for packaging and certain
      ingredients, including eggs, oils, sugars and other commodity
      costs.  The increase in variable manufacturing expense was partially
      offset by a 7.9% reduction in fixed manufacturing expense, due in part to
      changes in the Company’s vacation benefit plan.





**Gross
      Margin**





Gross
      margin decreased 2.7 percentage points in the first thirty-nine weeks of 2007
      compared to the same period of 2006.  This decrease was primarily
      driven by $2,019 in incremental depreciation resulting from a change in the
      estimated useful lives of certain assets at the Company’s Philadelphia
      operations combined with increased commodity costs.





**Selling,
      General and Administrative Expenses**





Selling,
      general and administrative expenses for the first thirty-nine weeks of 2007
      decreased to 29.0% of net sales, compared to 30.8% of net sales in the first
      thirty-nine weeks of 2006.  Towards the end of the first quarter and
      through the second quarter of 2007, the Company launched a new television
      advertising campaign aimed at supporting the Company’s brands and new products
      and at increasing sales volumes.   The costs associated with this
      campaign were more than offset by reductions in the cost of freight as well
      as
      by lower employee related costs.





**Non-Operating
      Items**





Interest
      expense decreased by $252, or 21.7%, in the first thirty-nine weeks of 2007
      compared to the first thirty-nine weeks of 2006.  This decrease was
      due to the net gain on the sale of certain interest rate swaps resulting from
      changes in the Company’s underlying debt structure as part of the financing of
      the new manufacturing plant, combined with lower average borrowing levels
      resulting from improved cash flow and working capital, as well as from $1,600
      in
      cash received from Keystone Redevelopment Partners, LLC for an option agreement
      that terminated in the fourth quarter of 2006.  The Company is exposed
      to market risk relative to its interest expense as certain of its notes payable
      and long-term debt have floating interest rates that vary with the conditions
      of
      the credit market.





-18-


Other
      income, net, decreased by $104 in the first thirty-nine weeks of 2007 compared
      to the same period of 2006.  The decrease was primarily due to a loss
      on the sale of equipment in the third quarter ended September 29,
      2007.





The
      effective income tax rate for state and federal taxes was 32.1% and 35.5% for
      the thirty-nine weeks ended September 29, 2007 and September 30, 2006,
      respectively.





**Liquidity
      and Capital Resources**





Current
      assets at September 29, 2007 were $34,640 compared to $29,161 at December 30,
      2006.  Current liabilities at September 29, 2007 were $20,329 compared
      to $19,791 at December 30, 2006.  The increase in current assets was
      primarily driven by an increase in receivables of $2,626, resulting from higher
      sales, as well as an increase in inventory of $1,167.





On
      May 9,
      2007 the Company announced that as part of its comprehensive operational review
      of strategic manufacturing alternatives, it entered into an agreement to
      relocate its Philadelphia operations to the Philadelphia Navy
      Yard.  This agreement provides for a 26-year lease for a yet to be
      constructed 345,500 square foot bakery, warehouse and distribution center
      located on approximately 25 acres.  Site preparation has begun and
      construction is expected to be completed by the end of 2009.  The
      Company expects the new facility to be fully operational in 2010.  The
      lease provides for no rent payments in the first year of occupancy. Rental
      payments increase from $3.5 million in the second year of occupancy to $7.2
      million in the final year of the lease.





As
      part of
      this initiative, the Company also entered into a 16-year agreement for $9.5
      million in financing at a fixed rate of 8.54% to be used for leasehold
      improvements.  This agreement provides for no principal or interest
      payments in the first year of occupancy and then requires equal monthly payments
      of principal and interest aggregating $1.2 million annually over the remainder
      of the term.





The
      Company also entered into an agreement to relocate its corporate headquarters
      to
      the Philadelphia Navy Yard.  This lease agreement provides for not
      less than 35,000 square feet of office space that is expected to commence upon
      the later of substantial completion of the office space or April 2009, and
      which
      ends coterminous with the new bakery lease.  The lease provides for no
      rent payment in the first six months of occupancy.  Rental payments
      increase from approximately $0.9 million in the second year of occupancy to
      approximately $1.6 million in the final year of the lease.





In
      connection with these agreements, The Company has provided a $1.1 million letter
      of credit, which will increase to $8.1 million by the beginning of
      2009.  The outstanding amount of the letter of credit will be reduced
      starting in year 17 and will be eliminated by the end of the lease
      term.





In
      addition to the facility leases, the Company expects to purchase high-tech,
      modern baking equipment.  This equipment is designed to increase
      product development flexibility and efficiency, while maintaining existing
      taste
      and quality standards.  The investment for this project, in addition
      to any costs associated with the agreements described above, is projected to
      be
      approximately $75 million through 2010.  In September 2007, to finance
      this investment and refinance the Company’s existing revolving credit
      facilities, as well as to provide for financial flexibility in running the
      ongoing operations and working capital needs, the Company closed on a $90
      million multi-bank credit facility and $27 million in low-interest development
      loans provided in part by the Commonwealth of Pennsylvania and the Philadelphia
      Industrial Development Corporation.  The Company also received a
      commitment for an additional $5 million low-interest development loan that
      it
      expects to close in September 2008.





**Cash
      and Cash Equivalents**





Historically,
      the Company has been able to generate sufficient amounts of cash from
      operations.  Bank borrowings are used to supplement cash flow from
      operations during periods of cyclical shortages.  A credit facility is
      maintained with four banks and certain capital and operating leases are
      utilized.





Book
      overdrafts are recorded within current liabilities.  Cash flows
      associated with book overdrafts are classified as financing
      activities.





On
      September 6, 2007 the Company closed on a $90 million multi-bank credit facility
      and $27 million in low-interest development loans provided in part by the
      Commonwealth of Pennsylvania and the Philadelphia Industrial Development
      Corporation. The Company also received a commitment for an additional $5 million
      low-interest development loan that it expects to close in September
      2008.  Proceeds from these agreements are expected to be used to
      finance the Company’s move of its Philadelphia manufacturing facility and
      corporate headquarters to new facilities to be constructed at the Philadelphia
      Navy Yard, as well as for working capital needs.





-19-


At
      closing, proceeds from the bank credit facility were used to repay approximately
      $8.9 million of existing term and mortgage loans and approximately $15.9 million
      of borrowings under the Company’s prior revolving credit facility, as well as to
      cash collateralize outstanding letters of credit, and settlement
      charges.





On
      August
      3, 2005, in order to hedge a portion of the Company’s exposure to changes in
      interest rates, the Company entered into a five-year $6 million interest rate
      swap with a fixed LIBOR rate of 4.64%.  The Company also entered into
      two five-year interest rate swaps for its term loans for $5.3 and $2.55 million
      on September 13 and December 21, 2005 with fixed LIBOR rates of 4.42% and 4.99%,
      respectively.  Also on December 21, 2005, the Company entered into an
      ten-year $2.15 million interest rate swap for its mortgage loan with a fixed
      LIBOR rate of 5.08%.  In June 2007, in connection with the Company’s
      strategic manufacturing initiative and the related financing, the Company sold
      the August 3, 2005 and September 13, 2005 interest rate swaps at a gain of
      $196.   In September 2007, in connection with the Company’s
      strategic manufacturing initiative and the related financing, the Company sold
      the remaining interest rate swaps at a loss of $68.





Net
      cash
      from operating activities for the thirty-nine weeks ended September 29, 2007
      totaled $2,152, mainly due to an increase in working capital of
      $4,941.  The increase in working capital was primarily due to
      increases in trade accounts receivable, inventory and prepayments and
      other.





Net
      cash
      used for investing activities for the thirty-nine weeks ended September 29,
      2007
      was $6,674, primarily consisting of $7,098 for capital
      expenditures.





Net
      cash
      flows from financing activities for the thirty-nine weeks ended September 29,
      2007 totaled $4,622, primarily driven by borrowings of long-term debt of
      $6,099.





The
      Company anticipates that for the foreseeable future cash flow from operations,
      along with availability from the new multi-bank credit facility and low-interest
      development loans will provide sufficient cash to allow the Company to execute
      upon the relocation of its Philadelphia operations as well as meet its other
      operating requirements.  The Company anticipates capital expenditures
      of approximately $20 million for fiscal 2007, $14 million of which are
      expenditures associated with the Company’s new manufacturing
      facility.





**Critical
      Accounting Policies and Estimates**




Management’s
      Discussion and Analysis of Financial Condition and Results of Operations is
      based on the condensed consolidated financial statements and accompanying notes
      that have been prepared in conformity with GAAP. The preparation of such
      condensed consolidated financial statements requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period.  Actual results could differ from those
      estimates.




Included
      in the Company’s Annual Report on Form 10-K for fiscal 2006 (“2006 Form 10-K”)
      are the significant accounting policies of the Company, which are described
      in
      Note 1 to the consolidated financial statements, and the critical accounting
      estimates, which are described in the Management’s Discussion and Analysis of
      Financial Condition and Results of Operations in the 2006 Form
      10-K.  Information concerning the Company’s implementation and impact
      of new accounting standards is included in Note 1 of the condensed consolidated
      financial statements included herein.  Otherwise, there were no
      changes in the Company’s critical accounting policies and estimates in the first
      thirty-nine weeks of 2007 which had a material impact on the Company’s financial
      condition, change in financial condition, liquidity or results of
      operations.





**Contractual
      Obligations**





Information
      regarding the Company’s contractual obligations is included in Item 7,
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations, of the Company’s 2006 Form 10-K.  During the thirty-nine
      weeks ended September 29, 2007, there were no material changes to the Company’s
      contractual obligations outside the ordinary course of business, other than
      obligations related to the agreements entered into as part of the Company’s
      strategic manufacturing initiative, obligations related to the new credit
      facilities and obligations related to income taxes accounted for under FIN
      48,
      as described in Notes 2, 5 and 11, respectively, to the Company’s condensed
      consolidated financial statements included in Part I., Item 1
      above.





-20-


**Forward-Looking
      Statements**





Statements
      contained in this Quarterly Report on Form 10-Q, including but not limited
      to
      those under the headings  “Risk Factors” and “Management’s Discussion
      and Analysis,” contain "forward-looking statements" within the meaning of the
      Private Securities Litigation Reform Act of 1995, and are subject to the safe
      harbor created by that Act.  Such forward-looking statements are based
      upon assumptions by management, as of the date of this Report, including
      assumptions about risks and uncertainties faced by the Company.  These
      forward-looking statements can be identified by the use of words such as
      "anticipate,'' "believe,'' "could,'' "estimate,'' "expect,'' "intend,'' "may,''
      "plan,'' "predict,'' "project,'' "should,'' "would,'' "is likely to,'' or "is
      expected to'' and other similar terms.  They may include comments
      about relocating operations and the funding thereof, legal proceedings,
      competition within the baking industry, concentration of customers, commodity
      prices, consumer preferences, long-term receivables, ability to develop brand
      recognition in the Company’s expanded markets, production and inventory
      concerns, employee productivity,  availability of capital, fluctuation
      in interest rates, pension expense and related assumptions, changes in long-term
      corporate bond rates or asset returns that could affect the recognition of
      pension corridor expense or income, governmental regulations, protection of
      the
      Company’s intellectual property and trade secrets and other statements contained
      herein that are not historical facts.





Because
      such forward-looking statements involve risks and uncertainties, various factors
      could cause actual results to differ materially from those expressed or implied
      by such forward-looking statements, including, but not limited to, changes
      in
      general economic or business conditions nationally and in the Company’s primary
      markets, the availability of capital upon terms acceptable to the Company,
      the
      availability and pricing of raw materials, the level of demand for the Company’s
      products, the outcome of legal proceedings to which the Company is or may become
      a party, the actions of competitors within the packaged food industry, changes
      in consumer tastes or eating habits, the success of business strategies
      implemented by the Company to meet future challenges, the costs to lease and
      fit-out a new facility and relocate thereto, the costs and availability of
      capital to fund improvements or new facilities and equipment, the retention
      of
      key employees, and the ability to develop and market in a timely and efficient
      manner new products which are accepted by consumers.  If any of our
      assumptions prove incorrect or should unanticipated circumstances arise, our
      actual results could differ materially from those anticipated by such
      forward-looking statements.  The differences could be caused by a
      number of factors or combination of factors, including, but not limited to,
      those factors described in the 2006 Form 10-K, “Item 1A, Risk Factors,” as
      updated below.  There can be no assurance that the new manufacturing
      facility described herein will be successful.  The Company undertakes
      no obligation to publicly revise or update such forward-looking statements,
      except as required by law.  Readers are advised, however, to consult
      any further public disclosures by the Company (such as in the Company’s filings
      with the SEC or in Company press releases) on related subjects.





**Item
      3.       Quantitative and Qualitative
      Disclosures about Market Risk**





For
      information regarding the Company’s exposure to certain market risk, see Item
      7A, Quantitative and Qualitative Disclosures about Market Risk, in the 2006
      Form
      10-K.  During 2007, the Company entered into commitments to purchase
      equipment for its new bakery facility at the Navy Yard that are denominated
      in a
      foreign currency.  In order to mitigate the risk associated with the
      changes in foreign currency exchange rates, the Company has entered into
      contracts that fix the exchange rates at each of the required dates that a
      payment is due in a foreign currency.  Certain additional payments may
      arise during the construction period that may be required to be paid in a
      foreign currency.  However, the Company does not believe that these
      amounts, if any, will be material enough to create a foreign exchange risk
      that
      is material to the financial statements.





**Item
      4.        Controls and
      Procedures**





(a)
      Evaluation of Disclosure Controls and Procedures





The
      Company maintains disclosure controls and procedures that are designed to ensure
      that information required to be disclosed in the Company’s reports filed or
      submitted pursuant to the Securities Exchange Act of 1934, as amended (the
      “Exchange Act”), is recorded, processed, summarized and reported within the time
      periods specified in the Securities and Exchange Commission’s rules and
      forms.  Disclosure controls and procedures include, without
      limitation, controls and procedures designed to ensure at a reasonable assurance
      level that such information is accumulated and communicated to the Company’s
      management, including its Chief Executive Officer and Chief Financial Officer,
      as appropriate, to allow timely decisions regarding required
      disclosure.





Management
      of the Company, including the Chief Executive Officer and Chief Financial
      Officer, conducted an evaluation of the effectiveness of the Company’s
      disclosure controls and procedures (as defined in the Exchange Act Rule
      13a-15(e)) as of September 29, 2007.  Based upon the evaluation, the
      Chief Executive Officer and the Chief Financial Officer concluded that the
      Company’s disclosure controls and procedures were effective as of September 29,
      2007.





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b)
      Changes
      in Internal Control over Financial Reporting





During
      the
      thirteen weeks ended September 29, 2007, there have been no changes in the
      Company’s internal control over financial reporting that have materially
      affected, or are reasonably likely to materially affect, the Company’s internal
      control over financial reporting.





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**TASTY
      BAKING COMPANY AND SUBSIDIARIES**





**PART
      II.  OTHER INFORMATION**


****


**Item
                  1A.**
              **Risk
                  Factors**


The
      Company’s 2006 Form 10-K includes a discussion of certain risks
      and uncertainties facing it, including those risk factors that
      could cause its actual results to differ materially from those stated in
      forward-looking statements contained in the 2006 Form 10-K and this Quarterly
      Report on Form 10-Q.   The new risk factors presented below
      should be read in conjunction with the risk factors and information disclosed
      in
      the Company’s 2006 Form 10-K.  Solely for purposes of the risk factors
      in this Item 1A, the terms, “we,” and “us” refer to Tasty Baking Company and its
      subsidiaries.





Indebtedness
      incurred in connection with our strategic manufacturing initiative could
      adversely affect our financial condition





On
      May
      9th, we
      announced that we had entered into agreements to relocate our Philadelphia
      operations.  Higher levels of indebtedness associated with this
      initiative could increase our vulnerability to general adverse economic and
      industry conditions; limit our flexibility in planning for and reacting to
      changes in our business and the industry in which we operate; and require that
      we use a larger portion of our cash flow to pay principal and interest, thereby
      reducing availability of cash to fund working capital, capital expenditures
      and
      other operating needs.





Our
      inability to successfully implement our strategic manufacturing initiative
      may
      have an adverse effect on results of operations and may restrict our ability
      to
      increase revenues, cash flows and net income





We
      are
      dependent upon third parties to construct the new facility and to deliver the
      high-tech, modern baking equipment. Unanticipated delays in the completion
      of
      the facility or delivery of new equipment could substantially increase the
      costs
      and ultimately the indebtedness associated with the
      initiative.  Unexpected increases in equipment or installation costs
      could also substantially increase the indebtedness associated with the
      initiative.  Unfavorable deviations from expected equipment
      performance or unforeseen difficulties associated with transitioning to a new
      facility could significantly increase the costs of future
      production.  Such unanticipated delays, cost increases or unfavorable
      deviations in equipment performance could also restrict the Company’s ability to
      increase revenues and profitability as well as have an adverse impact on our
      financial condition and results of operations.





****


**Item
                  2.**
              **Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds**


None
      in
      the third quarter of 2007.




**Item
                  4.**
              **Submission
                  of Matters to a Vote of Security
                  Holders**




None
      in
      the third quarter of 2007.





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**Item
                  6.**
              **Exhibits**


(a)
            Exhibits:





Exhibit
                10 (a) - First Amendment, dated as of September 25, 2007, to the
                Amended
                and Restated Employment Agreement, dated as of July 27, 2006, between
                the
                Company and Charles P. Pizzi.Exhibit
                10 (b) - Credit Agreement, dated as of September 6, 2007, among Tasty
                Baking Company and its subsidiaries, as Borrowers; Citizens Bank
                of
                Pennsylvania, as Administrative Agent, Collateral Agent, Swing Line
                Lender
                and Letter of Credit Issuer; and Bank of America, N.A., Sovereign
                Bank,
                and Manufacturers and Traders Trust Company, each as a Lender, is
                incorporated herein by reference to Exhibit 99.1 to Form 8-K, filed
                on or
                about September 6, 2007.Exhibit
                10 (c) - Credit Agreement, dated as of September 6, 2007, among Tasty
                Baking Company, as Borrower, the other Loan Parties thereto, and
                PIDC
                Local Development Corporation, as Lender, is incorporated herein
                by
                reference to Exhibit 99.2 to Form 8-K, filed on or about September
                6,
                2007.




Exhibit
                10 (d) - Machinery and Equipment Loan Fund Loan Agreement, dated
                as of
                September 6, 2007, between Tasty Baking Company and The Commonwealth
                of
                Pennsylvania acting by and through the Department of Community and
                Economic Development is incorporated herein by reference to Exhibit
                99.3
                to Form 8-K, filed on or about September 6, 2007.Exhibit
                10 (e) – Third Amendment to Industrial Lease Agreement dated July 23, 2007
                by and between L/S 26th
                Street South
                LP (assignee of Liberty Property/Synterra Limited Partnership) and
                the
                Company is incorporated herein by reference to Exhibit 10 (f) to Form
                10-Q, filed on or about August 7, 2007.Exhibit
                10 (f) – Fourth Amendment to Industrial Lease Agreement dated August 16,
                2007 by and between L/S 26th
                Street South
                LP (assignee of Liberty Property/Synterra Limited Partnership) and
                the
                Company.Exhibit
                31 (a) – Certification of Chief Executive Officer pursuant to Section 302
                of the Sarbanes-Oxley Act of 2002.Exhibit
                31 (b) – Certification of Chief Financial Officer pursuant to Section 302
                of the Sarbanes-Oxley Act of 2002.Exhibit
                32 – Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
                to Section 906 of the Sarbanes-Oxley Act of
                2002.





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**TASTY
      BAKING COMPANY AND SUBSIDIARIES**





**SIGNATURE**







Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Company has
      duly
      caused this report to be signed on its behalf by the undersigned thereunto
      duly
      authorized.





TASTY
              BAKING COMPANY(Company)November
                5, 2007
            By:
            /s/ Paul
              D. Ridder(Date)
            
            Paul
              D. RidderVICE
              PRESIDENT, CORPORATE CONTROLLER AND CHIEF ACCOUNTING OFFICER(Principal
                Accounting Officer)










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